Analysis: The STRC price stabilization mechanism has largely failed; Strategy may need to repurchase STRC to resolve the issue.

According to Mars Finance, on June 27th, Farside Investors published an analysis of Strategy's (MSTR) preferred stock, STRC, stating that STRC's so-called price stabilization mechanism is inherently unstable. The product was issued at $100 and designed with a mechanism to push the price towards $100: if STRC falls below $100, the company can increase dividends to push the price up; if it rises above $100, it can decrease dividends to suppress the price. If investors believe Strategy's credit risk has increased, the STRC price should fall, and if the company subsequently increases the dividend yield, it could further weaken the company's creditworthiness, leading to a "death spiral." Furthermore, the coupon rate is determined by the company itself and is not an automatic stabilization system, which exposes investors to significant uncertainty when assessing STRC. From a basic financial perspective, Strategy's issuance of a perpetual instrument with an 11.5% yield and use of the proceeds to purchase Bitcoin is a poor trade. Even with a long-term average annual increase of 10% for Bitcoin, coupled with a long-term inflation of 5%, Bitcoin could still be very successful, but it might not be able to cover the 11.5% annualized cost. If the price of Bitcoin falls in stages, the company may also need to sell BTC at a low price to pay interest, resulting in a net loss. Assuming the STRC coupon remains at 11.5%, its fair value, calculated at an 8% discount rate, is $144, significantly higher than the $100 issue price. Under this assumption, issuing STRC is a bad deal for Strategy, but investing in STRC might be a good investment. However, STRC is not a fixed-rate perpetual bond; Strategy has the right to lower the coupon by 25 basis points per month until it reaches the SOFR rate (currently around 3.6%). Considering this right, the estimated value of STRC is around $55. STRC is currently around $75, about 25% lower than the $100 target, the price stabilization mechanism is not currently functioning, and the company has not responded by raising the coupon. This means the mechanism has largely failed, and there is no clear reason for STRC to return to $100 in the future. If the market expects Strategy to gradually lower the coupon rate to SOFR, STRC should be close to $55. Strategy's most likely short-term option is to maintain the 11.5% coupon rate and temporarily ignore the STRC discount issue, continuing to pay the coupon by issuing new shares or selling Bitcoin. However, they believe this is merely a postponement. If the company truly wants to solve the problem, there are two realistic options: one is to start repurchasing STRC, and the other is to completely abandon the price stabilization mechanism and lower the coupon rate to SOFR. Repurchasing STRC is probably the most likely outcome, but the company may need some time to succumb to pressure and face reality.